Credit and overdrafts most popular funding methods for SMEs

January 21, 2014

The Public Accounts Committee (PAC) has released a report providing recommendations on how to improve the funding options available for small businesses, and suggests the Government provides a more ‘coherent’ strategy when it comes to introducing new funding initiatives.Current Government schemes

A recent Baker Tilly study found that most business owners were confused by, or unaware of, many of the Government’s current funding initiatives.

This is perhaps unsurprising, as the Department for BIS manages six major funding schemes, The Treasury and Bank of England oversee the Funding for Lending Scheme, and the much heralded British Business Bank is due to launch fully this year.

Despite all the ‘noise’ generated by the Government in recent years, overall lending to small firms has actually declined; the value of loans backed by the Enterprise Finance Guarantee has fallen each year since 2010. Similarly, the total net lending by the Finance for Lending scheme has fallen by over £2bn since its launch.

The Committee says that these schemes have been launched on an ‘ad hoc’ basis, to meet economic demands at the time, and therefore are not managed as a coherent unit. It recommends that the departments heading up funding initiatives use the launch of the new Bank as an opportunity to outline the aims of each scheme, and how they aim to benefit small businesses.

In the future, the PAC suggests that when departments “establish a scheme to address a particular market failure, they should set out clearly both what a successful impact on the market will look like and how they intend to evaluate its success.”

Small business owners in the dark

One of the main conclusions of the Baker Tilly study mentioned earlier was that the Government and business owners should jointly take responsibility for the lack of take-up of funding initiatives. 20% of respondents hadn’t heard of a single Government-backed scheme, 4% had heard of the ‘Patent Box’, and under 20% had heard of Venture Capital Trusts.

The PAC report also concludes that the major Government schemes have not been marketed sufficiency, and that the Department of BIS has not done enough to inform small businesses of the funding options available to them.

With credit cards and overdrafts still the most popular methods of financing for small business owners, the PAC suggests that SMEs simply lack the time to seek funding advice, and don’t necessarily see the Government as an obvious source for such information.

Advice could be better communicated via ‘intermediaries’ such as High Street banks, the report suggests.